It’s late at night and the office is quiet—except that you’ve got a nagging voice in your head. Your product is already two weeks behind schedule. You’ve got to get it out this week or lose the deal. But you’ve discovered a problem. To correct the problem would mean another three-week delay—and you know the client won’t go for that. It’s a small error—it’ll probably never become an issue. What do you do?
Managers face these kinds of issues all the time. Ethical dilemmas can arise from a variety of areas, such as:
- Advertising (desire to present your product or service in the best light)
- Sourcing of raw materials (does the company buy from a supplier who may be underpaying their people or damaging the environment?)
- Privacy (should the company have access to private e-mails that employees write on company time? or the Web sites they visit during work hours?)
- Safety (employee and community)
- Pay scales (relation of the pay of top executives to the rest of the company)
- Product pricing policies (variable pricing, discounts)
- Communication (with stockholders, announcements of plant closings, etc.)
It’s easy to think that people who behave unethically are simply bad apples or have character flaws. But in fact, it’s often the situation or circumstances that create the ethical pressures. A global study of business ethics, published by the American Management Association, found that the main reasons for a lapse of ethics are:
- Pressure to meet unrealistic business objectives/deadlines
- A desire to further one’s career
- A desire to protect one’s livelihood1The Ethical Enterprise: A Global Study of Business Ethics. (2005). New York: American Management Association.
Every day, managers and business owners make business decisions based on what they believe to be right and wrong. Through their actions, they demonstrate to their employees what is and is not acceptable behavior and shape the moral standards of their organizations. Personal and professional ethics are important cornerstones of an organization and shape its ultimate contributions to society in the form of corporate social responsibility.
Governments use laws and regulations to point business behavior in what they perceive to be beneficial directions. Business ethics implicitly regulates behavior that lies beyond governmental control. Business ethics refers to contemporary standards or sets of values that govern the actions and behavior of individuals in the business organization and the actions of the business itself. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations. The need for ethics in business is twofold. First, it prevents the external constituents of an organization (i.e., the public, other organizations, and the environment) from being harmed. Second, it benefits the organization internally by helping to ensure its success.
Good business ethics involves, but is not limited to, adhering to laws, regulations, and standards related to fair employment, product safety and quality, truthful advertisement, and environmental responsibility. Companies typically suffer from bad ethical behavior and gain from good ethical behavior.
Individual and Corporate Ethics
As the definition of business ethics suggests, business ethics is a broad term that applies to the behavior of the individuals who work at a business as well as the actions of the business itself. There is a narrower term, “corporate ethics,” that is used to describe the actions of a business. Corporate ethics express the values of an organization to its internal and external stakeholders. Corporate ethics has become such an important concern that there are now entire companies that have have developed a business model of monitoring the ethical behavior of businesses. These private firms track the world’s largest companies in areas such as corporate social responsibility, ethics, and sustainability, and then provide ratings, news, and data to investors and the general public. Websites such as Ethical Consumer promote “ethical consumerism” to help consumers act in the marketplace in ways that are consistent with their ethics. Year after year, familiar brands such as Nestle, Bayer, and Monsanto grace the top of the “worst of the worst” lists.
But it’s not all grim news or tattling when it comes to business ethics. For example, the Scottsdale, Arizona-based Ethisphere Institute—an organization focused on gauging ethical business practices—publishes a list of the “World’s Most Ethical Companies” on an annual basis. The overall goal of Ethisphere’s rankings is to reward organizations with good practices and offer a model—and actionable advice—on how corporate entities should conduct themselves, says chief marketing and strategy officer, Tia Smallwood. “The papers are filled with scandals and companies that made judgment errors, that made policy errors or that don’t have good practices in place to handle things like non-retaliation or transparency or open reporting, or have had a crisis and handled it poorly,” she said. “But there a lot of companies that are really trying to do things the right way.”2Strauss, Karsten. “The World’s Most Ethical Companies 2016.” Forbes. March 09, 2016. Accessed February 27, 2019.
Notable call-outs from the 2019 honorees are the eight firms that have been included every year of the list’s existence:
- Ecolab Inc.
- Fluor Corporation
- International Paper Company
- Kao Corporation
- Milliken & Company
- Texas Instruments
The reputation of a company reflects the ethical or unethical decisions of managers, and consumers often purchase the products or services of companies with a good reputation. If a business has a good reputation, consumers may prefer that company over similar businesses that offer the same products or services, even at higher prices. The companies TOM’s Shoes and Patagonia both advertise their ethical practices. And wise executives go to great lengths to repair their company’s reputation. For example, British Petroleum (BP) has extended cleanup and conservation efforts following oil spills, and Toyota has issued several major recalls to address potential problems associated with a faulty accelerator pedal.
A broad survey of consumers shows that many factors affect reputation but that ethics is the primary concern.3Percy Marquina Feldman, Rolando Arellano Bahamonde, and Isabel Velasquez Bellido, “A New Approach for Measuring Corporate Reputation,” Revista de Administração de Empresas 54, no. 1 (2014): 53–66 Customers will switch to other brands when a company appears in headlines reporting ethics violations. BP gas stations suffered a boycott for a year after the Gulf of Mexico spill. The volume of sales did not recover to pre-spill levels in that time.4Zhongmin Wang, Alvin Lee, and Michael Polonsky, “Egregiousness and Boycott Intensity: Evidence from the BP Deepwater Horizon Oil Spill” (discussion paper, Resources for the Future, February 2015).
A good reputation creates a buffer, a “halo” effect, where customers, suppliers, and regulators are slower to judge a company. Employees’ morale is better in ethical companies, and new employees are easier to hire. An ethics program also gives stock an edge. Ethisphere, an ethics consulting firm, found that share price of the publicly traded companies recognized as the 2016 World’s Most Ethical Companies consistently outperform other major indices, including performing 3.3 percent higher than the S&P 500 last year.5The Ethics Centre, “Investing in Ethics Pays Off Financially—Three Reasons to Care about Culture,” May 10, 2016. Exhibiting good business ethics is essential to the survival and success of a company.
Management 2020 text remixed from multiple sources under a CC Attribution-NonCommercial-ShareAlike 4.0 International License. View a complete list of original sources.